Friday, August 20, 2004

Perspectives on the Google IPO

Some interesting views on the success of the Google IPO, starting with Wired:

Though the 18 percent jump boosted the paper worth of Google shareholders and insiders, it also raised questions about the effectiveness of the unorthodox auction, which was designed to gauge true demand and set a rational price that wouldn't be subject to big swings.

However inept Googles handling of the IPO has been, there are many with an interest in seeing its innovative auction fail. The usual IPO process involves a group of investment banks building interest among their institutional clients (pension and mutual funds, insurance companies and the like) and setting a price that, they hope, will give those clients a decent return on their money. Google wanted to bypass this process for two reasons: so it could open its flotation from the start to a broad base of individual shareholders; and to avoid the pop (sudden price rise once trading starts) that often comes with bank-priced IPOs. But the strategy seems to have backfired: a policy of offering low or no sales commissions left brokers with little incentive to push the shares, and with the $15 price rise on the first day of trading the shares got a sharp pop anyway.

Yet today, having bettered [a $20B market cap] by a considerable margin in its IPO, Google is beset by second-guessers -- including people with distinct axes to grind -- who are calling the exercise a failure.

Google's management certainly did screw up in some ways. But overall, this IPO was a success. Don't let the naysayers, especially the Wall Street crowd, tell you otherwise.

The most important element of the success was the auction, which Google forced down the throats of investment bankers. Under the cozy old system, the bankers would set the price of hot IPO stocks grossly low and make sure their friends and favored clients got shares at the offering price, which they could then unload for fat profits.

This time, the company got the money, except for some relatively low fees to the banks. The stock had a modest ... first-day rise anyway, but the people profiting from that were those who bid in the public auction process, not insiders.